Re: Options expensing
On Fri, 28 May 2004 16:09:11 -0700, Sabri Oncu wrote: Eliminating that choice is very worrying for policymakers, not to mention the many US corporate leaders who rely on options to attract motivated employees. [...] Executives say they will have to cut or eliminate their options programmes as a result If stock options were so very wonderful and useful in attracting motivated employees, surely companies would want to boast about their options programmes, not to conceal them in the back of the accounts? dd
Re: Options expensing
it seems that options expensing is easy if firms are able to count options as a cost in their taxes (if I remember what Nomi said correctly). Simply count them as an equal cost when calculating profits for the stockholders. It's reminiscent of a land reform program I heard about (perhaps a fictional one, in Galbraith's THE TRIUMPH ) in which the landowners were compensated for their expropriated land according to the value that the claimed in their tax forms. Jim D.
Re: Options expensing
James Devine wrote: it seems that options expensing is easy if firms are able to count options as a cost in their taxes (if I remember what Nomi said correctly). Simply count them as an equal cost when calculating profits for the stockholders. Of course. It's reminiscent of a land reform program I heard about (perhaps a fictional one, in Galbraith's THE TRIUMPH ) in which the landowners were compensated for their expropriated land according to the value that the claimed in their tax forms. Fictionalized, but not in the least fictional. Right after the barbudos entered Havana on Jan. 1, 1959, a large number of capitalist properties were intervened and soon thereafter expropriated. The owners were offered full compensation *at the value they themselves had estimated on their tax forms*. This was the casus belli for the 45+ years of US economic, political, and covert military war against Cuba. Shane Mage When we read on a printed page the doctrine of Pythagoras that all things are made of numbers, it seems mystical, mystifying, even downright silly. When we read on a computer screen the doctrine of Pythagoras that all things are made of numbers, it seems self-evidently true. (N. Weiner)
Re: Options expensing
Right, I believe Guatamala did the same thing -- but that government was less successful. On Sun, May 30, 2004 at 09:21:36PM -0400, Shane Mage wrote: James Devine wrote: it seems that options expensing is easy if firms are able to count options as a cost in their taxes (if I remember what Nomi said correctly). Simply count them as an equal cost when calculating profits for the stockholders. Of course. It's reminiscent of a land reform program I heard about (perhaps a fictional one, in Galbraith's THE TRIUMPH ) in which the landowners were compensated for their expropriated land according to the value that the claimed in their tax forms. Fictionalized, but not in the least fictional. Right after the barbudos entered Havana on Jan. 1, 1959, a large number of capitalist properties were intervened and soon thereafter expropriated. The owners were offered full compensation *at the value they themselves had estimated on their tax forms*. This was the casus belli for the 45+ years of US economic, political, and covert military war against Cuba. Shane Mage When we read on a printed page the doctrine of Pythagoras that all things are made of numbers, it seems mystical, mystifying, even downright silly. When we read on a computer screen the doctrine of Pythagoras that all things are made of numbers, it seems self-evidently true. (N. Weiner) -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Re: Options expensing
First, I must say I'm still blushing over Yoshie's generous compliments. Second, stock options should be expensed. They are a component of employee compensation just like salary or cash bonuses. Ironically, every congressional and corporate debate to the contrary uses the argument that stock options ARE compensation as the reason for them NOT to be treated AS compensation. As it stands, corporations can deduct stock options as wages on their income tax returns. They have no difficulty determining stock option values for this purpose. Yet, the related costs don't impact net income. The result is tax liability reduction and net earnings overstatement. Senator Joseph Lieberman last year argued that attempts to place a precise value on stock options will only confuse investors. (The same logic - still in place - allowed Enron and other corporations to abuse derivative trading disclosure) Apparently, confusion is a greater evil than deception. That selective use of stock option valuations causes significant earnings inflation. Even Alan Greenspan (a man oblivious to the inequity of the entire tax system) noted the result of the practice was corporate earnings inflation of 6-9%. This is beside the fact that 66% of US-based corporations pay no federal taxes anyway. It is interesting that the writer of the article is on Intel's policy board. Last August, Intel said it would have posted net income of $606 million for the second quarter of 2003, instead of the $896 million it did post if it had used the FASB's suggested fair-value method. But, hey, what's a 48% lie between corporate and congressional friends? In the end, the issue is one of integrity. Expensing expenses provides a more accurate picture of a company's true financial condition, period. For various Congressional factions to impede the transparency process is to enforce continued corporate mugging from the investing public. Nomi Prins -Original Message- From: PEN-L list [mailto:[EMAIL PROTECTED] On Behalf Of Sabri Oncu Sent: Friday, May 28, 2004 7:09 PM To: [EMAIL PROTECTED] Subject: [PEN-L] Options expensing What does our Nomi say about this? Best, Sabri +++ Congress is right to challenge options expensing By JAMES GLASSMAN Financial Times / May 27, 2004 Friday A battle has erupted between the US House of Representatives and the Senate over an accounting rule that could profoundly affect the way fast-growing companies do business and whether the economy continues to thrive. The issue is how to treat stock options, but the point of contention is whether questioning the actions of a private accounting board is interference in the work of independent professionals or the responsible discharge of a legislator's duties. Companies award options that executives and other workers can cash in years later if the stock price rises. Since no one knows what the options will be worth, it is impossible to value them accurately at the time they are granted. Yet the Financial Accounting Standards Board, the private body that sets US accounting rules, has been waging a long war to require options to be treated as expenses. In 1972 the FASB's predecessor ruled that options need not be treated as expenses because of the concerns that (they) could not be reliably valued. But now the bureaucratic wheels are turning. The FASB issued its official proposal on March 31, with comments due by June 30. If it has its way it will institute options-expensing next year. Under current rules companies can choose to provide information in their financial reports about their options obligations, to estimate the expense without placing it on their profit-and-loss statements, and to show the impact on earnings as it occurs. Eliminating that choice is very worrying for policymakers, not to mention the many US corporate leaders who rely on options to attract motivated employees. With the FASB's new rule in effect, earnings for companies in the Standard Poor's 500 stock index would have been 11 per cent lower in 2003 and 19 per cent lower in 2002. Executives say they will have to cut or eliminate their options programmes as a result. George Chamillard, chair man of Teradyne, the chipmaker, says options have become an important recruiting tool for Asian companies, and the US is losing some of its brightest engineers. It was these concerns that earlier this month caused an influential subcommittee of the House of Representatives to approve a bill that would stop the Securities and Exchange Commission, the main financial watchdog, enforcing the FASB rule. The bill would oblige companies to treat as expenses only the value of options granted to a company's top five executives. It would also exempt small companies from having to treat options as expenses and would delay expensing by new companies for three years. The bill, introduced by Richard Baker, the subcommittee's chairman, has a good chance of passing the House, but there are objections
Re: Options expensing
Nomi: First, I must say I'm still blushing over Yoshie's generous compliments. No need to blush. After Yoshie's post and Ahmet's correction, I checked Doug's website and agreed with Yoshie. By the way, until I checked Doug's site, I had not known that you are a female. Nomi is just a genderless name to me and, by default, I assumed that you are a male. This has nothing to do with that I am a sexist or anything, by the way. I was just being a naïve mathematician making a probabilistic assessment. Just look at PEN-L: How many females are there who post to it? As it stands, corporations can deduct stock options as wages on their income tax returns. They have no difficulty determining stock option values for this purpose. Being an anal (I heard this term many times and guess that it means analytic) person, I have problems with this employee stock options valuation. They are extremely complicated animals to value, assuming that we have the right model parameters at hand. So, in their valuation, anything goes: assumptions about model parameters, assumptions about exercise dates, as well as their mathematical properties, so forth. The value of these options depend on what assumptions you make, which means that this is a political issue as opposed to a scientific issue. As a mathematician I met in this finance business once said: Finance is the most democratic discipline you can imagine. Here, theorems are not proved. They are declared true or false through referendum. But I agree with you: expenses must be expensed. If only I knew how in the case of employee stock options. Best, Sabri
Re: Options expensing
Nomi can blush after her book comes out soon. From the parts I have seen, it is highly recommended. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Options expensing
What does our Nomi say about this? Best, Sabri +++ Congress is right to challenge options expensing By JAMES GLASSMAN Financial Times / May 27, 2004 Friday A battle has erupted between the US House of Representatives and the Senate over an accounting rule that could profoundly affect the way fast-growing companies do business and whether the economy continues to thrive. The issue is how to treat stock options, but the point of contention is whether questioning the actions of a private accounting board is interference in the work of independent professionals or the responsible discharge of a legislator's duties. Companies award options that executives and other workers can cash in years later if the stock price rises. Since no one knows what the options will be worth, it is impossible to value them accurately at the time they are granted. Yet the Financial Accounting Standards Board, the private body that sets US accounting rules, has been waging a long war to require options to be treated as expenses. In 1972 the FASB's predecessor ruled that options need not be treated as expenses because of the concerns that (they) could not be reliably valued. But now the bureaucratic wheels are turning. The FASB issued its official proposal on March 31, with comments due by June 30. If it has its way it will institute options-expensing next year. Under current rules companies can choose to provide information in their financial reports about their options obligations, to estimate the expense without placing it on their profit-and-loss statements, and to show the impact on earnings as it occurs. Eliminating that choice is very worrying for policymakers, not to mention the many US corporate leaders who rely on options to attract motivated employees. With the FASB's new rule in effect, earnings for companies in the Standard Poor's 500 stock index would have been 11 per cent lower in 2003 and 19 per cent lower in 2002. Executives say they will have to cut or eliminate their options programmes as a result. George Chamillard, chair man of Teradyne, the chipmaker, says options have become an important recruiting tool for Asian companies, and the US is losing some of its brightest engineers. It was these concerns that earlier this month caused an influential subcommittee of the House of Representatives to approve a bill that would stop the Securities and Exchange Commission, the main financial watchdog, enforcing the FASB rule. The bill would oblige companies to treat as expenses only the value of options granted to a company's top five executives. It would also exempt small companies from having to treat options as expenses and would delay expensing by new companies for three years. The bill, introduced by Richard Baker, the subcommittee's chairman, has a good chance of passing the House, but there are objections in the Senate. Richard Shelby, who heads the Senate banking committee, does not want Congress threatening the independence of the FASB. He says the board's success depends on its ability to remain insulated from the political process, and that a misguided assault is under way. Mr Shelby is a smart legislator, and there are respectable reasons to support the FASB's decision, but the senator's concern about interference is itself misguided. In 1973 the SEC subcontracted its responsibility for setting financial accounting and reporting standards for publicly held companies to the FASB while maintaining ultimate control. Just as they oversee the SEC, the US's elected representatives have the authority - as well as the moral and legal obligation - to review the activities of the FASB, especially when its decisions can imperil the US economy. The FASB has a single mission: to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Federal policymakers have a far broader mission. Even if the FASB's expensing proposal were cogent from an accounting and financial viewpoint - which many doubt - Congress has a duty to consider its economic impact. Mr Shelby is correct that Congress should not intervene in the FASB's normal work nor politicise the rule-making process. But that is not what is happening. Instead, Congress is doing its duty. Mr Baker and more than 100 others in the House, plus many in the Senate, believe the FASB is moving down a path that could harm the US's competitive advantage in high technology. They want to slow the options-expensing express, and would be negligent if they did not take action to do so. The writer, a resident fellow at the American Enterprise Institute and host of the website TechCentralStation.com, is a member of the policy advisory board of Intel, which makes extensive use of employee stock options.
